By itself, taxation cannot help the poor. The best it can do is to exempt the poor from taxation. This it can do by exempting the poor from the income tax. Goods and services that the poor consume are not subject to the VAT. There is no VAT on unprocessed goods such as fish, vegetables, and rice. Education and health care are VAT-exempt. There was a time when kerosene, the fuel of the poor was exempt from the VAT.
Good tax policies help ensure that the poor bears no burden in financing government. But the poor can only be helped by giving them a greater share in the county’s wealth through pro-poor expenditure policies. These are through direct transfers such as the Pantawid Pamilya program, and programs that give the poor greater access to basic education and health care. Programs that benefit agriculture and rural areas are redistributive as well. The poverty incidence among farmers is about 34.3 percent compared to a national average of 21 percent.
Thus, I cannot see why the DOF is upset with the findings of the PIDS studies that the TRAIN has regressive effects. Even without the numbers, it is easy to deduce how the poor can end up bearing a higher tax burden than the rich from TRAIN.
Excise taxes are generally regressive. They take away a greater percentage of the income of the poor than the rich. The PIDS studies also showed that the increase in excise taxes on fuel contributed to inflation. A steady increase in prices hit the poor the hardest. The Tuano study noted that TRAIN increased prices by an average of 1 to 3 percent. Tuano also observed a slight increase in the poverty incidence as a result of TRAIN. Without the provision for transfers, poverty incidence would have been worse. Fortunately, it was part of TRAIN.
There are other features of TRAIN that benefit the rich and lightens their tax burden. The most glaring pro- rich measure is the reduction in the inheritance tax from 20 percent to 6 percent. A wealth tax is a powerful tool that can reallocate wealth from the affluent to fund pro-poor expenditures. The measure further distorts taxation of unearned income. Interest income from savings is taxed more heavily at 20 percent.
The reduction in the excise tax on luxury cars compared to lower priced vehicles is a regressive measure. And so with the elimination of the personal exemption in computing taxable income. Personal exemptions recognize differences in needs among taxpayers, i.e. taxpayers with more dependents are entitled to higher exemptions. While the O percent tax rate on taxpayers with incomes of P250,000 and below offered tax relief to taxpayers, the Manasan study notes that the decline in the tax burden of taxpayers from the poor deciles is smaller compared to the reduction in the tax burden of those from the higher income deciles. Although TRAIN increases the marginal income tax rate on the very rich taxpayers to 35 percent, they account for a very small percentage of our population. (A report by Credit Suisse notes that only 0.1 percent of the Philippines adult population have fortunes amounting to over $1 million.)The changes made by TRAIN on the personal income tax system were observed not to be pro-poor.
The principal reason for tax reforms is to raise revenues for government. They cannot be pro-poor since the poor do not have enough income to be part of the taxpaying population. The least that we expect from tax reforms is to promote a progressive distribution of the tax burden. Those who have more should contribute more in relation to their income. And for the poor to have a greater share from the revenues that are raised.
The numbers say that the tax reforms are not progressive. Let us hope that the expenditure numbers are more favorable to those who are less fortunate.